聯合利華 (UL) 2008 Q3 法說會逐字稿

Welcome to Unilever's third quarter 2008 conference call, hosted by Jim Lawrence, Chief Financial Officer, and James Allison, Head of Investor Relations, followed by a question and answer session. (Operator Instructions). We will now hand you over to Mr. Jim Lawrence.

Good morning. Welcome to all of you on the call. This telephone conference comes a little earlier than prior calls. We have explained the rationale to many of you, specifically we want to communicate our results closer to the opening of the markets, and I hope this proves to be a more effective use of your time as well as ours. I am joined today by James Allison, our Head of Investor Relations.

In a little under two weeks from now we are looking forward to seeing a number of you at our investor event in Port Sunlight. We look forward to that. It will give us an opportunity to provide deeper insights into the far reaching changes we have been making to Unilever. It has been designed as a Touch and Feel event. I hope you take the opportunity to get to know our business even better through that event.

Now, as usual, I draw your attention to the disclaimer related to forward-looking statements and non--GAAP measures.

Now, with that out of the way, let me begin by sharing with you what I consider to be the highlights of our performance so far this year. We are pleased with these results, which are fully in line with the goals we set for ourselves at the beginning of the year. Specifically, we've been growing competitively in line with our markets, we've been improving margins sustainably, and we are gaining market share where the return on investment is attractive.

This has been made possible by the strength of our brands, our broad geographic footprint and importantly, the actions we have taken over the last three years to improve our performance. We have strengthened our relative position and this will serve us well as we move forward.

Now, as to the results, the environment is clearly challenging. Commodity costs have increased dramatically, adding nearly EUR2b to our costs in the first nine months. Consumer demand is under pressure as recessionary conditions begin to take hold in a number of markets.

We, however, have remained competitive. We have taken timely pricing action, and our savings programs are delivering ahead of expectation. And this has allowed us to continue to invest behind our brands, and our sales have grown, in aggregate, in line with our markets.

Overall advertising and promotional expenditure is up by EUR100m and our share of advertising spend relative to competitors in our markets has increased. Our D&E business continues to grow strongly with organic sales of close to 15% in the year-to-date with broad-based growth across our key markets. Overall, our volumes are holding up well.

Growth in underlying operating profit is 9% in the year-to-date and underlying operating margin has improved by 30 basis points. Earnings per share has increased by 26% in the nine months to September 2008, boosted of course by profits from disposals.

Our balance sheet is strong and our financial management is prudent and disciplined. This is serving us well in the current volatile financial markets, where we are benefiting from the flight to quality. We continue to access commercial paper at sub-LIBOR rates. We have, in recent days, renewed our 364 day revolving credit facilities which back up our commercial paper program.

Our working capital improved in the quarter. Cash-flow from operations was strongly ahead of a year ago.

These results demonstrate the benefit of actions already taken during the last three years, a more focused portfolio of brands and businesses, a streamlined organization, fewer but bigger innovations, rolled out more quickly, better, more disciplined execution, and clearer priorities. These together have made our business simpler, more agile and faster, and position us well to emerge as a winner from the current economic crisis. I will come back to my views on how we have strengthened our relative position in my closing remarks.

Having covered the results in outline and some of the important drivers of improvement, let's now turn to look at some of the details. Our sales in Q3 were EUR10.4b. That is 1.8% ahead of last year. This was after a 1.1% negative impact of disposals and an adverse currency effect of 5%.

The latter continues to reflect the strength of the euro, which is our reporting currency, against a wide range of currencies. Now, the recent strengthening of the US dollar, if sustained through the end of the year, would reduce the full year negative currency impact to just over 4%, whereas the year-to-date position is 5.8%. And, in fact, if the US dollar had been our reporting currency, the turnover growth would have been 13% for the nine months through September.

Now as it is, our underlying sales growth in the quarter was 8.3%. 70 basis points of this increase was attributable to the prior year US IT system implementation which had the effect of pulling EUR70m of sales from quarter three into quarter two last year. Now, our 7.4% USG, underlying sales growth, for our nine months, that's a wash in that.

Price continues to be the primary driver of growth. We raised prices to offset the impact of cost inflation. Despite these actions, we have seen volume growth in the quarter, and for the first nine months, approaching 1%. For the most part price increases necessary to cover commodity cost inflation have now been taken.

Let's turn to our growth performance by region. We'll start with Europe. Underlying sales growth in Europe was 2.5% in quarter three, slightly higher than the year-to-date position. Sales in Western Europe grew by 1.4%, with 4.3% coming from price and consequently, volumes were down 2.8%. Volume did improve in the quarter, relative to Q2, helped by better performance in Ice Cream.

We continue to see a difficult trading environment, with consumers down-trading to private label, particularly in some of our food categories. In other categories, such as Personal Care and Household Cleaning, we have seen very limited down trading. As a channel, discounters are doing well in this environment, and our brands are growing well in the discount channels.

Spreads continue to be the biggest source of volume reduction for us, reflecting the very substantial price increases which have been taken to offset commodity cost increases. It is our intention to win this back, and later you will hear about some of the actions we are taking to do so.

Performance in the Netherlands, Italy and the UK remains competitive, and we have seen some recovery in Spain, although Germany softened in the quarter and France remains a difficult market.

Our transformation program for Europe continues to progress well. This is far-reaching and an important source of productivity. The benefits from transformation will be used to further strengthen our brands and our competitiveness. Whilst we are not yet where we want to be, you will have the opportunity to see at Port Sunlight how far we have already traveled, and the opportunities we have ahead.

Our business in Central and Eastern Europe continues to grow ahead of the market with broad-based share gains. Russia had an excellent quarter, another one, growing at 20%.

The Americas region grew by 8.2% in the quarter and a little over 6% if the US IT systems implementation impact is excluded. Again, of course, it's a wash, and year-to-date, the Americas have grown 6.5%. In the US, our performance is very much in line with the markets in which we operate. Our adjusted underlying growth levels are around 4% for the quarter and for the year-to-date.

Growth is coming from price, with market volumes down in Home and Personal Care and flat in Foods. There has been some down-trading to private label in our markets, but our own market shares have remained firm.

Latin America grew by 12% in the quarter, maintaining the momentum of the first half. This represents a strong performance, with growth ahead of markets. Brazil, an important business for Unilever, continues to improve performance, with growth close to 10% in the quarter.

Asia/Africa continues to post strong, broad-based growth, with underlying sales increasing by 16% in the quarter. Volume growth in Q3 was 3%. The year-to-date volume growth rate of 5% is in line with the average over the last two decades and is despite the unprecedented level of price increases.

Overall, most economies remain healthy, with all main D&E countries growing well for us in both volume and value. Whilst market growth may slow from the very high, and it should be said, price-driven levels which we've seen year-to-date, we do expect growth to remain healthy in the developing and emerging markets for Unilever.

So with that I am now going to pass you over to James, who will begin by taking you through category performance.

Thank you Jim, and good morning to everyone. There was a strong and balanced performance across our categories this quarter, and innovation has played a key role. As innovation will be a key feature in the upcoming investor event and road shows, I will not dwell for too long on examples today.

Savory, Dressings and Spreads grew by over 7% in the quarter and by over 8% year-to-date. Pricing has been the main component of the growth in Spreads and Dressings, driven by unprecedented levels of edible oil price inflation.

Important recent innovations include new Hellmann's mayonnaise made with the goodness of real milk launched in Brazil and Mexico and the launch of Family Goodness margarines enriched with added vitamins to deliver energy and vitality to consumers. So far this year, Savory growth has been more evenly weighted between price and volume.

Our new range of Bertolli oven baked products, launched in the US this quarter, adds to the portfolio of Bertolli's restaurant quality meals and offers consumers a lower cost alternative to eating out.

Following the launch of Knorr bouillon gels in China, this product format has been rolled out in Europe as Knorr Stockpot. In the UK, Marco Pierre White has endorsed these bouillons as the 'closest thing to professional stock'.

Ice Cream and Beverages grew by over 7% in quarter three. Year-to-date growth is now approaching 6%. Magnum continues to perform very well across the globe, increasing share and growing by 9%. Ben & Jerry's is growing faster still. Growth in Leaf and Powder teas remain at close to 10% for the quarter, and for the year-to-date. Again, growth is equally weighted between volume and price.

Innovation includes the new Lipton pyramid range of herbal and specialty teas launched across CEE and most recently in the UK, tempting consumers with real pieces of fruit, refreshing herbs and aromatic spices.

Homecare grew by almost 12% in quarter three. Year-to-date sales are now up over 9%, with good contributions from both volume and price. In Fabrics Cleaning, the launch of Small and Mighty liquids, with the inclusion of new essential oils, is driving strong momentum in the UK. Dirt is Good is also performing well, particularly in Asia/Africa. The introduction of Domestos Grotbuster and CIF Actifizz across Europe are the key drivers behind the double digit growth in Household Care this quarter.

Personal Care grew over 8% in the quarter, and by just under 7% for the year-to- date. Again, we have seen a good balance between volume and price growth. Innovation is driving growth with double digit performances for all three global deodorant brands, Rexona, driven by the Rexona for Men re-launch, Axe with the new Dark Temptation variant, and Dove with Go Fresh and Clinical Protection. The successful new Pond's anti-age and skin lightening range continues to deliver throughout Asia.

So in summary, bigger innovation, delivered through strong brands and rolled out faster than ever before. Now, let's turn to the actions we are taking to address the current economic downturn.

Economic conditions have clearly worsened. Unilever has enviable experience in a variety of difficult economic conditions. We know the actions we need to take to address changing consumer needs and shopper behaviors, and these actions will vary from category to category.

For example, in Europe, some categories such as Meals, and Meal components thrive in a recession. Others, such as Hand and Body, are more prone to down-trading. In some categories, such as Laundry, consumers use less product, and some categories, such as Deodorants, are largely unaffected.

Let's take the example of Margarine, a category that as well as being a healthier and more convenient substitute for butter is, and always has been, a value proposition. Here we have the opportunity to catch consumers down-trading from butter. The return to home cooking is another potential source of incremental volume.

So, in the Spreads category we are adjusting our activities with this in mind. We will maintain or increase advertising support, drive consumption moments around breakfast and home cooking, use buttery propositions to appeal to taste and value conscious consumers, provide bigger packs for value shoppers and smaller packs for those managing a weekly budget, and we will position our brands in discount channels and club stores with relevant promotional support. We have a set of action plans to deal with this in all of our categories, and we will have the chance to go through some of this in more detail at Port Sunlight.

We have also been more outspoken in defending the strength of our brands, especially when challenged by Private Label. This chart gives one example of a campaign we are running in the Netherlands.

For those of you who don't speak Dutch and those of you, like me, whose eyesight is not what it once was, the advert is entitled 'Are we going to compare?' and then goes on to point out real differences between Unilever's Calve brand of peanut butter and the leading retailer own brand. This is what it highlights, the taste of more peanuts, no added sugars, good source of nutrition, and rich in vitamin E. Calve tastes better according to independent taste trials. It is no coincidence that Calve peanut butter has been Holland's favorite for 60 years. This is another example of the actions we are taking to reinforce our brand equity and to highlight differences in product attributes from retailer own brands.

Let's now look at what's been happening to commodity costs. Commodity price inflation has added over EUR800m of incremental cost to our P&L in quarter three. This 800 basis point increase represents the highest impact point on our P&L as higher priced edible oil covers are utilized and mineral oil related increases feed through from suppliers. More recently, we have also seen substantial cost increases coming through on a range of agricultural commodities such as tomatoes, tea and beef extract.

All these together have contributed to the cost escalation in quarter three. We expect to see some improvement in quarter four, and for the full year impact to be around 600 basis points, roughly EUR2.5b of incremental cost, year-on-year. We do anticipate far more benign conditions in 2009.

Turning now to investments in marketing, in-market advertising and promotional expenditure was EUR20m higher in the quarter. So far this year, we have invested an additional EUR100m behind our brands and our share of advertising spend relative to competitors in our markets has increased. Savings from media efficiency programs and lower media rates in some developed markets have been reinvested.

We believe that, in periods of severe commodity-cost-driven price inflation, relating marketing spend to turnover as the preeminent metric, places too much emphasis on pricing and not enough on volume. When pricing returns to normal levels, reviewing advertising and promotional expenditure as a percentage of turnover will regain its relevance.

As you will have seen from our announcement, the ratio of advertising and promotional expenditure to sales is down 50 basis points in the year-to-date and 70 basis points in the quarter. The fact is that we have continued to invest in brand equity at a time when others have taken a more cautious approach. Lastly, we have strong programs to drive better returns from the investments we make in both consumer promotions and trade spend.

Our overall savings programs continue to deliver strongly and now stand at just in excess of EUR800m for the year-to-date, well on track to deliver in excess of EUR1b for the year. Half the savings have been generated from buying, with a further EUR250m coming from our restructuring programs. Regional and local savings initiatives contribute an additional EUR130m.

Restructuring costs were EUR160m in the quarter and are EUR490m in the year-to-date. We continue to expect full year restructuring charges of around EUR1b. Jim will go into more detail on our savings programs at Port Sunlight.

Now, let's look at the drivers of operating profit in the year-to-date and in the quarter. And let's do this in absolute money and in constant exchange rates, because it makes the underlying performance easier to understand.

First, the year-to-date performance. The contribution from volume and mix was around EUR200m. The strength of our brands has enabled us to take price increases of around EUR2b. Commodity cost increases reduced operating profit by around EUR1.9b, and other costs increased by EUR550m. So whilst pricing has covered commodity cost increases, it has not been sufficient to cover overall cost increases.

As I mentioned earlier, our extensive savings programs have delivered EUR800m. Finally, in-market advertising and promotional expenditure increased by EUR100m. This has left an underlying increase in operating profit of around EUR450m, 9% up on the first nine months of 2007.

Now, let's look at the quarter. Here are the drivers of operating profit change in the quarter, again in absolute money and measured in constant exchange rates. The contribution from volume and mix was around EUR100m. Price increases added around EUR800m. This was not enough to cover commodity cost increases of over EUR800m and other cost increases of around EUR200m. So in quarter three you can see that despite the significant levels of price increases, costs increased by more.

Balancing this, our savings programs continued to accelerate, and delivered over EUR300m. Finally, as mentioned earlier, in-market A&P expenditure increased by EUR20m. This left an underlying increase in operating profit of around EUR150m, again 9% more than the same quarter in 2007.

Now, let's look at operating margin. The operating margin in the first nine months was 18.8%, boosted by disposal profits and there was an underlying improvement in operating margin of 30 basis points. Savings have contributed 270 basis points, offsetting a negative costs, price and mix impact of 290 basis points. Advertising and promotional expenditure, up by close to EUR100m, benefits from the price-driven accelerated top line growth, and contributes 50 basis points to the margin.

With that, I am now going to hand back to Jim.

Well, thank you, James. Our earnings per share grew by 26% in the nine months to September 2008. And the graph now displayed summarizes the various key drivers for EPS growth. The operational drivers together contributed 9% to our EPS growth.

There was a negative impact of 6% from currency and a further negative 5% from tax, and that reflects the substantial favorable settlements of tax audits in the first half 2007. RDIs added a positive 26%, which were boosted by the after-tax profit on the disposals of Lawry's and North American laundry of over EUR0.6b, EUR600m. Finally, our share buyback program has added about 2% to EPS growth.

The instability of the financial markets has reminded us of the virtue of a strong balance sheet and prudent financial management. Access to low cost commercial paper was available to Unilever throughout the quarter. This was achieved at very competitive rates, reflecting a flight to quality and the reassurance of a strong balance sheet and strong cash generation. Our commercial paper program is backed by a revolving 364 day drawdown facility with a number of banks. This has been successfully renewed with principal banks in recent weeks.

Net debt has reduced to EUR8.7b at the end of September. Cash-flow from operating activities in the quarter was EUR2b, which is up EUR0.5b on the same period last year. And this brings the year-to-date cash generation from operating activities to EUR2.5b, which is slightly behind 2007 but obviously on an improving trend. Working capital improved substantially in the quarter after frankly a weak quarter two. We are making good progress, and we expect to see further improvement in quarter four.

In the third quarter, we received EUR1.1b in pre-tax cash proceeds from the disposals of North American laundry and the Lawry's seasonings brand. So far this year the total pre-tax cash proceeds from disposals amount to EUR1.6b. This compares to EUR100m in the same period last year. Finance costs of net borrowings were 4% lower in the first nine months as we optimized our country mix of borrowings and we have completed EUR1.5b of share buybacks in the year. We have no immediate plans to do more but will keep this under review.

As at the end of September, the net pension deficit was unchanged from the position at the beginning of the year. This is because both assets and liabilities have reduced by EUR3b. The liabilities have reduced because of material increases to the corporate bond spreads, or double A discount rates, which are used to discount liabilities. So, on this basis, our funded pension plans are in surplus to the tune of EUR1b, and we have unfunded plans of EUR2.1b, making a net deficit overall of EUR1.1b. With the interim dividend announced today, we will have returned EUR2.2b to shareholders in dividends during the year, and with the EUR1.5b of share buyback, the total return to shareholders will be EUR3.7b for the year.

So let me summarize. In a tough and uncertain economic environment, we have strengthened the relative position of Unilever. We have priced decisively to cover cost increases and utilized our savings programs to offset some of the impact on our consumers and customers. Our ability to price so effectively is a testament to the strength of our brands.

Our wide geographic base provides us with extensive experience in managing our businesses and our brands in difficult economic times. Our savings programs are far-reaching and they are on track. We continue to raise the bar on innovation and science, and you will hear much more about this at Port Sunlight.

We have continued to build brand equity, increasing our advertising spend relative to competitors in our markets. Our strong balance sheet, financial management and strong cash generation position us well to access capital competitively.

We are set to deliver underlying sales growth for the full year 2008, well in excess of our 3%-5% target range. And we will do this while delivering an underlying improvement in operating margin. With that, ladies and gentlemen, we are ready to open the wires to Q&A.

(Operator Instructions). Thank you. Our first question comes from the line of Marco Gulpers from ING. Please go ahead.

Yes, good morning Jim. This is Marco Gulpers from ING. Three questions if I may. The first is on your guidance for commodities for the full year. You are now guiding to around 600 basis points, but are also looking for a moderate improvement on your end in the fourth quarter. Could you share with us your visibility on why you believe there is an improvement likely in the fourth quarter?

The second question is on, are you now actually looking for a decline in fourth quarter margins, because you're talking about an increase in A&P spending, you're talking about a slowdown in pricing, and you're talking about a slowdown in cost savings. So should we now pencil in a decline in margins in the fourth quarter?

The third question is on basically on Europe. You said in your press release that you are not happy yet, or that you are not there where you want to be. Could you update us where do you want to be at the year-end with respect to volume growth in Europe? Thanks.

Marco, thanks for those three questions. Taking them in order, at the end of the second quarter, we had guided for the full year at about 550. We now take that up just a touch to 600.

We have seen -- we did expect that we would see a peaking of commodity costs in the third quarter, but what we know is that we buy a lot of things forward, and so we knew what a lot of things would cost in the third quarter because we bought them in either the first or second quarter, and this works its way through, and now we have pretty good visibility on the fourth quarter.

There's still some stuff that we buy on the spot market, but the great bulk of what we are going to use in the fourth quarter, we have bought through. We have pretty good visibility, and as we said, we expect the peak to be the third quarter, and then we expect it to be down in the fourth quarter, although still up year-on-year, and hence 600 for the half year.

Now, as for the second question regarding our Q4 guidance, I'm not going to give quarterly guidance. We give annual guidance and we'll stick with that, we -- as we've said, just as I closed my remarks, we will show an increase in underlying operating margin for the year and we have sales which are well in excess of our 3%-5% longer-term guidance.

As to Europe, what we're trying to do in Europe is not quarter-by-quarter. We're trying to improve quarter-by-quarter, but again, I'm not going to give an expectation for performance in the fourth quarter here. We're pleased that it improved relatively from Q2 to Q4.

We're moving in the right directions. The restructuring program is going well. We're taking the proper actions in market. We're making ourselves more effective in our sales approach, and all this is going to be covered by Doug Bailey when we get together in Port Sunlight and you'll be the judge of the progress made and what's ahead of us.

Marco, if I could just make a comment. You -- when you were asking your question about fourth quarter margins, you were -- I think you were suggesting that we were saying that our savings program was slowing down. Actually, what we've said is that our cost savings year-to-date are very healthy, at EUR800m, and we were guiding to be in excess of EUR1b for the year as a whole. That's not meant to imply any slowdown.

Thanks for that.

Okay, thank you.

Thanks very much. Our next question comes from the line of John Parker from Deutsche Bank. Please go ahead.

Yes, good morning. Could I ask a couple of questions? You were sounding pretty confident about the outlook in developing and emerging markets. I think you're saying that you expect growth to remain -- to slow, but to remain healthy. I wonder what sort of timescale I should be attaching to that comment and what sort of visibility you feel you have. Are you just looking at the current year there or are you sufficiently confident to say that that remark applies to next year as well?

Second question, I missed a bit on Marco's so you may have answered this. But if not, are you -- if commodity costs remain where they are now -- commodity prices, can you give us any sort of guidance to the impact that will have on you in 2009, perhaps compared with the 600 basis points adverse effect that you're talking about in 2008? I guess it's going to be lower, but are you able to hazard any sort of order of magnitude, assuming current commodity prices remain where they are?

John, thanks for the two questions. And first, we do feel confident about the D&E markets. Our businesses are doing well in the third quarter. We expect them to continue to do well in the fourth quarter. We do expect the economies in the D&E world to slow from the sort of rate that they have been growing at in the last 18 months or so. But while those economies slow, we still expect to see good growth in those economies, and growth substantially higher than in the developed world.

We do expect to see pricing come down in the D&E world from the very substantial levels that it's at now. And we've got a 20-year record of D&E growth over that whole time of 9% with 5% volume. At the moment our volume is a little bit lower than that long-term record and so one of the things that we want to do is swap around between price and volume as we look out.

As to the timescale, I'm really not giving either a quarter worth, nor am I giving you specific guidance for next year. But looking into next year would be the way I described that confidence.

Now as to the commodities cost, again, this is not a time where we're going to give specific guidance for 2009. But just as you posed the question, there's no doubt that commodity costs at the level that they are now, if you look into next year, the year-on-year growth would be substantially less than the year-on-year growth this year.

Thank you.

Thank you, John.

Thank you very much. Our next question comes from the line of Warren Ackerman from Dresdner Kleinwort.

Good morning. It's Warren Ackerman here at Dresdner. Couple of questions as well, and the first one is regarding use of cash flow. I was just wondering if you could update us in terms of your intentions on cash flow from the sale of US Laundry. I note your comments about no buyback in Q3 and no immediate plans to accelerate the buyback. So I'm just wondering whether you can give us an outlook on use of cash flow.

The second one is about market share positions across your three regions of D&E, Europe and the Americas. At the Q2 stage you gave a useful table showing the pluses and minuses in the share by the three regions. If you could do that again that would be helpful.

And just finally on the cash flow, EUR500m improvement quarter on quarter, can you maybe walk us through a bit more the drivers behind that in terms of the working capital, what's happening as a percentage of sales and also on the pension costs? Thank you.

Sure, Warren. Thanks very much. First as to use of cash flow, given the uncertain financial markets that we're in now, we think it's prudent to, first of all, make sure that we hold on to our A-plus rating. So right at the top of the list is we want to make sure the ratios are such that hold on to our A-plus rating.

We have an extensive restructuring program that we're going through. And so that's the first operational use. We have just declared a dividend. And with that, as I mentioned earlier, we will have returned this year EUR3.7b. We have no immediate plans to take our share buyback beyond the EUR1.5b. And that's obviously included in the EUR3.7b.

As to the table, I'm going to ask James if he would do that.

Yes. I think, Warren, hi Warren, you asked about our market share positions and in the context of what we shared with you last time. So let me just say that overall, for the year-to-date, our markets are growing by roughly 6% according to our estimates. And our own growth level is slightly above 7%, as we've shown to you. So we've broadly gained market share overall.

Let me just go down into the regional level. In D&E we're clearly growing ahead of the market. We think the markets have been growing about 11% for the year-to-date. We've grown 15%.

In the US we're growing slightly ahead of the market. Overall our estimate is that the market is growing by about 3% there, against Unilever's growth rate of 4%. Now within the US there've been some categories where we've gained share, and there's others where we've lost share. So we've seen share gain in spreads, mayonnaise, sauces, deodorants, and we've seen some loss of share in leaf tea, ice cream, where we're trying to build our margin position, and also in face care and hand and body. So some categories where we're up, some categories where we're down, but broadly we're growing in line with the market.

In Western Europe we continued to be in a position where our growth is behind the market and here we have seen private label intrusion, particularly into our Foods categories. And you're going to be hearing much more about what we're intending to do about that at Port Sunlight in a couple of weeks' time.

But again, even in Western Europe, there are certain categories where we're doing very well and other categories where we're doing less well. So we've gained market share in tea, deodorants, oral care, household care. We've held share in ice cream and laundry, skin care, but we've lost a bit of share in, particularly in those categories where our price increases have been the heaviest. So we've lost some share in spreads and in dressings and in savory. We've also lost a little bit of share in hair, but hair for us in Europe is not a particularly big category.

And the overall market growth for Europe in Q3 compared to Q2? You said in Q2 3% for the market.

We think it's around the same, Warren, around 3%.

And you're still at 2%?

Yes.

That's what you said, I think, at Q2 or is it a bit worse than that?

Well, 1.4% I think is the figure for Western Europe.

Okay. And cash flow?

Don't forget, we report Central and Eastern Europe with Western Europe. Central and Eastern Europe are growing ahead of markets. It's Western Europe where we're losing some share. That's the place where we've got to focus on improvement and we'll be discussing that at Port Sunlight. You'll hear from Doug Baillie on that.

Lastly, on working capital and cash flow. You know we've got a long-term good record of reducing working capital as a percent of sales. However, in the second quarter we said we were unhappy with the buildup in working capital. That's due to a number of factors, the commodity price inflation, our own buildup of stocks during the change program, centralization of supplier management in Switzerland, and a particular calendar effect which caused payments to be received right after we closed the quarter.

In any event, we don't make excuses for that. We said we weren't happy with it. We said we were going to work on it in the balance of the year. And, in fact, during the third quarter cash flow was up EUR0.5b more than the year before. And the working capital reduction was EUR200m better than the year before. And that was a reduction from the end of the second quarter of EUR600m. And we're happy with that, but we've still got more to do.

You asked about pensions. Cash cost of pensions were EUR300m lower in this quarter than last year, EUR500m lower in the first half of the year. We have more cash cost restructuring and CapEx in this year as our acceleration -- as we're accelerating our transformation program.

Okay. Very helpful. Thank you.

You bet. Thank you, Warren.

Thank you very much. Our next question comes from the line of Xavier Croquez from Exane. Please go ahead.

Good morning gentlemen. It's Xavier Croquez at Exane. I'd like to come back on the first question regarding D&E. It's very hard to read D&E figures these days with all the pricing which is locked in. You made comforting comment looking into '09.

Can we get a sense of what's going on perhaps by sub-region within D&E of what's going on on volume momentum because you hinted on a few examples where there were slower volume momentum in Q3 versus H1? That may happen on a quarterly basis. It can be driven by a price hikes. So can we get a sense of what's really going on on the volume side in D&E perhaps by sub-regions? Thank you.

Sure. The first thing I want to say is, just to be clear, we do expect the economies in the D&E world to slow from the rates of growth they've been and we expect to see pricing to slow. But we still think the growth in D&E is going to be attractive as we look out.

Now just to give you some specifics about our business, and you have to remember, we have a very broad geographic footprint. In total, our value growth was 15%. Volume growth is 4% year to date, but 3% in quarter three.

Now just to give you a few countries, India, quarter three volume was 7%, price was 14%, underlying sales growth was 21%. That's slightly up on the year to date where we had volume of 7%, price of 12% and underlying sales growth of 20%.

In China in quarter three, we had volume of 8%, we had price of 6% for a total of 14%. That's down a bit from year to date where the underlying sales growth of 18%, made up of 2% price and 16% volume.

Indonesia, which is an important market for us, the volume in the third quarter was 2%, the pricing was 16%, for a total of 18% underlying sales growth. Whereas for the year to date the volume was greater, 6%, the price was a bit lower, 14%, and underlying sales growth was 21%.

A contrast from South Africa where in the third quarter we had 8% volume on top of 20% pricing for a total underlying sales growth of 30%. And year to date in South Africa we've got 4% volume, 16% price, 20% underlying sales growth. So it's just a few examples from the D&E.

Can we get an example on Latin America? Sorry.

Sure. No, of course. In Brazil we had 1% for volume, 8% for price in quarter three, that's 9% overall. That matches -- actually it's a little bit better than the year to date which is 8%. Again 1% volume year to date, 7% price.

And for Latin America overall, James?

My question beyond these examples is that if there is a pattern, you have been pricing up, pricing up, pricing up, and at some point you will not price as much. Is there an assumption implicit in your statement that actually returning to negative re-pricing, because these types of pricing are ahead of even local inflation, should help volumes a bit? Or it's very hard to call where we stand. I know it's not easy on your side as well, but you're closer to the business, so what lies behind your statement volume-wise on D&E market?

Yes. First, we do expect to see continued local inflation in the D&E world so we are not trying to imply that there'll be negative pricing. What we believe about these markets is that even if the economies slow down a bit, there continue to be new consumers coming into the moneyed class where they're able to buy our products, that the consumers in the middle continue to increase their consumption habits of our products. So that even if the export economy of a D&E world cools down, the business that we're in and our ability to grow our business will continue to be there.

Yes. If I can just add a couple of things here. Xavier, you asked about Latin America and our growth in Latin America year to date is 12% with volume of 2% to 3%. And Latin American growth in the quarter was also 12%, volume 1% and the price was 11%. But we had a particular problem in Mexico in the quarter and we expect that not to continue and therefore we expect that would be -- the underlying volume would be a little bit better than that suggests.

And then to your more general point, I just want to come back to what history tells us about D&E, and at the risk of repeating ourselves. We have been looking back over the last 20 years at our performance in the developing and emerging markets and we'd want to restate that the average underlying sales growth every year was 9%, and that the volume component of that was 5%. And there, as you know, have been many times where we've had turbulent economic conditions in a number of major markets during that period.

Final thing I just want to add there is that when we looked at this more recently and tried to evaluate the growth in our developing and emerging markets in hard currencies, we get to a figure of, on average, 7%, maybe just slightly above 7% per annum for the whole of the 20 years. So it is --

9% is in constant, but the 7% is in euro.

Yes, it's in euro because some people have suggested that the currency effect here could take the number down. Well it doesn't. It's still very healthy. So that's the track record over the last 20 years. We don't have a crystal ball as to what's going to happen next, but that's what our track record is.

Okay. Sorry to drill further down on this one. Looking at the 20 years, they have been bumpy years. Can you give us the range on the volume that we have experienced and the range on organic growth that you saw, the lowest and the top figure around that average? The late '90s must have been not particularly exciting.

I tell you what, Xavier, we'll give you a call and give you that number specifically. Just briefly, there was no year in which volume was negative, no year in which price was negative.

Okay.

Thank you.

Thank you very much. Our next question comes from the line of Julian Hardwick from RBS. Please go ahead.

Morning. You mentioned in the statement that you're expecting the disposals to dilute margins 20 basis points fourth quarter, 30 basis points next year. Could you tell us what the EPS dilution you would expect to be?

Secondly, given that Q3 is the high water mark for the commodity cost increases, should we assume it's also the high water mark for pricing? Or given the lags, is pricing likely to remain at these elevated levels in the near term?

And finally, as you're looking into next year, should we expect any significant change in your financing costs?

As to the third question, I'm really -- I'm not in a position to make a comment on that, other than what I said about the experience we've had this year, which has been a flight to quality and very good pricing on the commercial paper.

As to your second question about pricing, we've taken the prices pretty much that we're going to take in the developed world. In the D&E world though, as I said in a relatively earlier question, there continues to be some inflation and so there may be some pricing there.

And I'll turn the EPS question over to James.

Yes. Thanks Julian. The impact on our earnings per share we estimate at around 1.5% from the disposals.

That's for next year is it?

Yes.

Okay. Just going back on the financing point, can you tell us what proportion of your debt is exposed to fluctuations in the financial markets?

Well right now we have, I think, about EUR2.5b of commercial paper outstanding. That fluctuates between EUR4b and EUR5b normally, but we're looking now to hold that down. So that's the amount. 70% is fixed -- of our debt is fixed.

Okay. So your uncertainty is just on the commercial paper side at the moment?

Well, it's on the commercial paper side. And also we may choose to take some more long money and I can't say what the price will be when we do that. We're -- as you can see we're quite pleased with the cost of financing that we've achieved over the course of this year.

And Julian, if I can just add, we've had lots of questions more recently about our commercial paper program and the extent to which we were still able to get our commercial paper away and at what kind of rates. And just to confirm what we've been saying in many telephone calls over the course of the last few weeks is that our commercial paper program is still very active. We're still able to get our paper away and we're able to get it away at very, very competitive rates as a result of the flight to quality. So it's still a very important (multiple speakers).

Okay. That's great. Thank you.

Thank you, Julian.

Thank you very much. Our next question comes from the line of Michael Steib from Morgan Stanley. Please go ahead.

Good morning. My question relates to the Personal Care business in North America. You mentioned in the statement that volumes were down compared to last year, or lower than last year. Could you just elaborate on that a little bit more? Is that down mostly to just market weakness or is it due to competitor activity?

We think it's due to market weakness, that as the United States has been coming into more difficult economic times you see the consumers using -- cutting back on things like hand and body lotions, using up stocks in home of shampoos. By contrast, our food lines are holding up better as more people eat at home.

But it's not like personal care competitors have become a lot more promotional or anything like that and you've been losing share as a result of that? That's not the case is it?

No. We've actually grown our volume. We think our market share position is perfectly sound in the US. So what's been happening there to our business is in line with what's been happening in the markets.

Okay. Thank you.

Actually a little bit better than the markets.

Okay. Thank you.

Thank you very much. Our next question comes from the line of Robert Jan Vos from Fortis. Please go ahead.

Yes. Hi. Good morning gentlemen. I have one question. You stated that the restructuring costs year to date were EUR490m and you stick to the guidance of EUR1b. That implies a [heavy] fourth quarter. Can you perhaps elaborate a bit on what projects you expect for the fourth quarter and where you will spend these restructuring costs?

Yes. I'm not going to name the projects for the fourth quarter. But I will say that we've already made a number of plant announcements during October and it is not untypical for us to have a back-end-weighted program.

Just to give you a perspective though, we said that when we announced the transformation program that we'd be streamlining or closing 50 to 60 factories. At this point we've closed 17, we've announced the closure of 8, we've announced streamlining of 30, and we have had a headcount reduction of 7,000 compared to a target of 20. And I'll be going into more detail about that at Port Sunlight, but that's the state of the program briefly.

Okay. Thank you.

Thank you. We're coming up on nine o'clock so I'm going to propose to just take one last question.

Okay. Thank you. Our next question then comes from the line of Martin Deboo from Investec. Please go ahead.

Good morning gentlemen. Martin Deboo, Investec. Two unconnected questions. One a technical one, the effective net interest rate on average net debt has looked lower than I would have expected in the last two quarters. Is that to do with the timing of the disposal proceeds coming in in Q3 or if you could just clarify what the difference between that and underlying net interest.

The second question, completely different, is you alluded earlier to the fact that you have presence in the discount channel, which I assume you mean what we would call the hard discount channel. Can you give me some color around what the nature of that presence is in categories and things, and also how strategically you view doing business in that channel? If the latter is something you're going to talk about at Port Sunlight, I'm happy to defer it to then, but if not, I'd be interested to hear.

Well we will talk about that more at Port Sunlight. But briefly, the discount channel is growing. We think it's important that we serve the discount channel with differentiated offerings which make sense both for them and their consumer and what their consumer is looking at, and what makes sense for us and what makes sense for us relative to our offering to other retailers.

As to the financing, finance costs on net borrowing were 12% lower than third quarter, 4% lower in the nine months, and that's despite a high level of debt. It's not about the, so much about the timing of the proceeds. Obviously the proceeds help and they help to reduce the debt otherwise. Our average interest rate is under 5% and really that's achieved because of the way we've optimized the country and currency mix of our borrowings.

Okay, Jim. Thank you for that. Thank you.

We've come up on nine o'clock so I'd like to thank everybody for having joined us. For those of you who will be at Port Sunlight, we look forward to seeing you then.